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NEW YORK STATE DEPARTMENTOF FINANCIAL --------------------------XIn the Matter ofPROSPECT LENDING, LLC IN LIEU OF TRUE NAMEPROSPECT MORTGAGE, LLCCONSENT ORDERLimited Liability ---------------------------XThis Consent Order ("Order") is made and entered into by and between Prospect Lending, LLCin lieu of the true name Prospect Mortgage, LLC ("Prospect") and the New York State Department of FinancialServices (the "Department") (collectively "the Parties"), evidencing an agreement between the Parties to addressconcerns raised by the Department during the processing of Prospect's mortgage banker Change of Controlapplication and processing of applications for Mortgage Loan Originators ("MLO") sponsored by Prospect, aswell as concerns identified during the Department's May 20 10 examination of Prospect, subject to the terms andconditions set forth herein.I.RECITALSWHEREAS, Prospect, headquartered at 15301 Ventura Boulevard, Suite D300, Sherman Oaks,California 91403, was originally licensed by the Department as a mortgage banker under the name "MetrocitiesMortgage, LLC" ("Metrocities") in July 2002;WHEREAS, in March 2006, the Department raised concerns relating to Prospect's "SeriesLLC" limited liability operating structure. In various written and verbal communications between Prospect andthe Department, Prospect was notified that use of the "Series LLC" structure in New York required each"Series" to obtain a separate license or registration to conduct New York activities. In addition, Prospect wasprohibited from utilizing additional "assumed names" (dba) in New York or the "Series" structure withoutobtaining the proper license or registration.WHEREAS, Prospect Holding Company, LLC ("Holdings") submitted a mortgage bankerchange of control application (the "Application") to the Department in May 2007 seeking approval to acquireMetrocities pursuant to Article XII-D of the New York Banking Law ("Banking Law").1Subsequently,
Holdings consummated the acquisition of Metrocities without the approval of the Department in violation ofArticle 12-D, Section 594-b.l ofthe New York Banking Law. Thereafter, in February 2009, Metrocities' namewas changed to "Prospect Mortgage, LLC", and in September 2009, the Department granted Prospect approvalto use the fictitious name: "Prospect Lending, LLC";WHEREAS, during the processing of the Change of Control application, a subsequentexamination of Prospect in 2010, and the processing of MLO applicants sponsored by Prospect, the Departmentexpressed concerns regarding the operational control environment and management oversight of Prospect;WHEREAS, the Department's 2010 examination of Prospect identified violations of Article 12 D and 12-E of the Banking Law, Part 38 of the General Regulations of the Banking Board, Parts 410 and 420 ofthe Superintendent's Regulations and Article 8, Section 254 of New York's Real Property Law. Specifically,Prospect was responsible for the following activities: (1) in some instances, collecting loan discount fees toreduce the initial rate, but failing to give borrowers the discounted interest rate associated with such fees; (2)facilitating mortgage loan origination activities through unlicensed mortgage loan originators; (3) conductingbusiness with unlicensed entities, and through unauthorized web sites and unlicensed branch locations; (4)conducting business with 29 entities that engaged in the solicitation of New York loans pursuant to "AffiliatedBusiness Arrangements" under the Series LLC structure, in violation of Article XII-D of the New York BankingLaw; (5) failing to disclose loan origination information; (6) failing to issue commitment agreements to certainborrowers, and (7) failing to maintain books and records in compliance with banking laws and regulations;WHEREAS, during the processing of MLO applications for applicants sponsored by Prospect,the Department notified Prospect of concerns that their MLO applicants were not directly employed by Prospectand were engaging in loan origination business through series limited liability companies;WHEREAS, during the 2010 Fair Lending examination, which covered 2008 through 2009, theDepartment found that Prospect's compliance systems needed improvement. Specifically, the Departmentfound the following violations: (1) violation of 3-NYCRR-38.7(a)(1) for misrepresenting loan terms withrespect to charging discount points that had no benefit to the borrower; (2) violation of Superintendent'sRegulations Part 408.2 and Section 296-a (4)(a) of the Executive Law, for failing to clearly state the specificreason for rejecting an application, and (3) violation ofthe Superintendent's Regulations Part 410.7(f) for failure2
to comply with record retention requirements and not including rate sheets in the list of documents to beretained. Additionally, the Department found that Prospect's fair lending plan did not include third partyproviders and periodic reviews as required by the Department's Industry Letter ofFebruary 18, 2000.WHEREAS, in February 2011, the Department notified Prospect and the other regulated entitiesthat effective January 2, 2011, individuals who were not listed as "approved" or "approved-conditional"(collectively "licensed") could not engage in mortgage origination activities;WHEREAS, in March 2011 Prospect provided the Department with information relating to theW-2 status of sponsored MLO applicants. Additionally, in August 2011, Prospect notified the Department thatProspect improperly allowed unlicensed MLO applicants to engage in mortgage loan solicitation activities afterreceipt of the Department's letter notifying regulated entities that unlicensed MLOs could not originate loans on1-4 family property located in New York;WHEREAS, on July 8, 2011, the United Stated Department of Housing and UrbanDevelopment ("HUD") entered into a Settlement Agreement (the "Agreement") with Prospect for violations ofHUD/FHA requirements and the Real Estate Settlement Procedures Act ("RESP A").Specifically, theAgreement alleges that a series limited liability company that originates and funds FHA insured mortgages inthe manner conducted by Prospect did not comply with HUD/FHA's guidelines for the operation of branchoffices. Additionally, the Agreement alleges that certain "affiliated business arrangements" or series of limitedliability companies operated by Prospect did not comply with RESP A requirements governing affiliatedbusiness arrangements, including the requirement for sufficient initial capital and separate dedicated employees.Further, Prospect agreed to, amongst other things, pay HUD 3.1 million.NOW, THEREFORE, as a result of the foregoing concerns, the Department requires Prospect toagree to the following conditions in order to resolve the Department's concerns with Prospect's prior conduct:IITERMS AND CONDITIONS1.Compliance with Laws and Regulations.Prospect shall adopt policies and proceduresdesigned to ensure compliance with all applicable federal and state laws, regulations, and supervisoryrequirements relating to its mortgage business, including, but not limited to, the following federal and state laws3
and regulations:a.Truth-In-Lending Act ("TILA"), and its implementing regulation: Regulation Z ofthe Board;b. Real Estate Settlement Procedures Act ("RESPA"), and its implementingregulation: Regulation X;c.Home Mortgage Disclosure Act and its implementing regulation: Regulation C;d. Fair Housing Act (42 U.S.C. 3005);e.Equal Credit Opportunity Act ("ECOA") (15 U.S.C. 1691);f.Consumer Credit Protection Act (15 U.S.C. 1601);g.Sections 254-b and 254-d ofNew York Real Property Lawh.Section 296-a of the New York State Human Rights Law (N.Y. Executive Lawsection 296-a);i.Article 12-D of the New York Banking Law;J.Article 12-E of the New York Banking Law;k. Part 38 of the General Regulations of the Banking Board; and1.Part 410 of the Superintendent's Regulations.Prospect shall continue to submit such policies and procedures to the Superintendent in accordance with theterms set out below. Where no time frame is provided, or where the Superintendent requests supplementalinformation to demonstrate the Parties' compliance with applicable laws, regulations and supervisoryrequirements, Prospect shall provide such information within a reasonable time upon request.2.Compliance Program.Within 120 days from the effective date of the Order, Prospectshall submit to the Department a revised formal written compliance program designed to ensure compliance byProspect with all applicable federal and state laws, regulations and supervisory guidance and with Prospect'spolicies and procedures with respect thereto. The program shall, at a minimum:a.Designate a compliance officer responsible for day-to-day oversight of itscompliance program. The compliance officer must be independent of Prospect'sloan origination and marketing functions;4
b. Establish a compliance training program for employees, board of directors, andindependent contractors, if any, for Prospect;c.Provide for reviews of third-party service providers and vendor management;d. Establish an automated processes utilized to manage such providers' overallcompliance function;e.Provide for periodic review of policies and procedures to ensure that such policiesand procedures reflect current laws, regulations and regulatory guidance;f.Provide for oversight of the compliance function by Management and periodicreports by the chief compliance officer to the Board of Director's ComplianceOversight Committee and/or the Board of Directors with respect to the efficacy ofthe compliance program;g. Provide for periodic reviews of Prospect's business functions governing thelicensing and approval of mortgage loan originators, branch locations, and assumednames;h. Establish an enhanced training program by doing the following: a) maintain a log ofall training attendees; b) ensure that all training attendees certify that theyunderstand and will uphold the state and federal fair lending laws and regulations;c) ensure that compliance staff receives appropriate compliance training to carry outtheir responsibilities in an effective manner;i.Enhance the second level loan review process by ensuring the reviews areperformed by an employee holding a higher title than the initial reviewer.J.Ensure that Prospect's third-party providers understand and acknowledge theirresponsibility to comply with New York Executive Law §296-a by requiring thoseproviders to certify their understanding and acknowledgement in a writtenagreement, andk.Develop a written exception policy and an exception log.5
3.Authorized Names and Locations. Prospect shall take all necessary steps to ensure thatany names or locations utilized by Prospect, including websites, in soliciting or advertising mortgage loanproducts on 1-4 family residential property located in New York, are properly licensed or authorized by theDepartment for use in Prospect's New York operations.Additionally, Prospect shall take steps to ensure thatall websites used in conducting its New York operations are owned by Prospect.4.Series Limited Liability.Prospect confirms that it no longer operates affiliatedbusinesses through Series Limited Liability structure, and will not so in the future in New York unless and untilit has taken steps to comply with the licensing requirements of Article 12-D of the Banking Law.5.Mortgage Loan Originator.Prospect shall develop and implement comprehensivepolicies and procedures governing the supervision of mortgage loan originators. Such policies and proceduresshould, at a minimum, address: 1) prohibited conduct outlined in Part 420 of the Superintendent's Regulations;2) the use ofwebsites owned and controlled by mortgage loan originators; 3) the use of social media networkingsites and 4) a description of the corrective action to be taken to address noncompliance with Prospect'sestablished policies and procedures.6.Loan Pricing Records. Prospect shall take appropriate steps to ensure that, for eachapproved loan, all required loan pricing records be maintained in compliance with the record retentionrequirements of Article 12-D of the Banking Law. A complete loan pricing file must include, but is not limitedto: 1) the initial interest rate offered and discount points charged to each borrower; 2) any special or incentivepricing program offered during the period, and 3) rate sheets and pricing adjustments. All of the forgoingrecords must be maintained as part of the borrowers loan file for Required Mortgage Disclosures.Prospectshall maintain comprehensive records documenting Prospect's compliance with required mortgage disclosures,including, but not limited to, TILA, RESPA, ECOA and Part 38 of the General Regulations of the BankingBoard.7.Books and Records.In addition to the requirements in paragraph 6, Prospect shallmaintain books and records in a manner that will enable the Superintendent to determine whether Prospect iscomplying with all applicable federal and state laws, regulations, supervisory requirements and guidance letters.6
8.Heightened Supervisions. For a period of three years beginning on the effective date ofthis Order, Prospect shall submit to semi-annual comprehensive examinations by the Department at thediscretion of the Department.III.RELIEF AND PAYMENTS1. Loan Discount and Escrow Waiver Fees(a) Refund of unearned loan discount fees. Prospect agreed to and has facilitated anindependent review ofloans closed during the period January 1, 2008 to August 31, 2011 forborrowers that were charged a loan discount fee in order to determine whether such borrowersreceived a bona-fide discounted rate.(b) Restitution. Prospect Mortgage agreed to and has refunded the borrowers identified insubparagraph (a) above, which total270 loans. The aggregate amount of refunds paid to theseborrowers by Prospect was 427, 154.50.2.Penalty. Prospect agrees to pay a penalty of three million dollars ( 3,000,000.00) to address theviolations of laws and regulations previously cited in this Order.3. Borrower Relief Reports. Prospect agreed to and has provided the Department with reports identifyingborrowers entitled to relief under the provisions of Section III of the Order.4. Compliance Progress Reports: Prospect also agrees to provide reports on a quarterly basis during thethree-year period covered by this Order to assist the Department in evaluating compliance with theprovisions of this Order. Such reports shall, at a minimum, address measures taken or proposed, thetimeline for such action or the proposed timeline for such action to be undertaken, compliance review oroperational audits conducted to evaluate the effectiveness of such corrective action and an indication asto whether senior management has reviewed and/or approved the corrective measures.7
IV.MISCELLANEOUS TERMS AND CONDITIONS1.The Parties acknowledge that the failure of Prospect to comply with any of the termsand conditions of this Order may result in the Department taking action to terminate Prospect's license toengage in the business of a mortgage banker under Article 12-D of the Banking Law.2.The Parties acknowledge that entering into this Order shall not bar, estop, or otherwiseprevent the Superintendent, or any state, federal or local agency or department or any prosecutorial authorityfrom taking any other action affecting Prospect, any of its current or former owners, officers, directors,employees, or insiders, or their successors or assigns.3.Notwithstanding the provisions of the immediately preceding paragraph 2 above, nofurther action will be taken by the Department against Prospect for the conduct set forth in this Consent Order,provided Prospect complies with the terms and conditions of this Consent Order, however, the Department mayundertake enforcement action against Prospect for transactions or conduct that Prospect did not disclose to theDepartment in written materials it provided to the Department during the Department's review of the 2006Series LLC limited liability structure, the 2007 mortgage banker Change of Control application, the 2010applications for MLOs sponsored by Prospect and the 2010 examinations conducted by the Department,including the Fair Lending examination.4.This Order may not be altered, modified or changed unless in writing signed by theSuperintendent or his designee.5.This Order shall be enforceable and remain in effect unless stayed or terminated inwriting by the Superintendent or his designee.6.The effective date of this Order is the date on which the Order is executed by the ChiefExecutive Officer, Ronald L. Bergum.8
7. All written communications to the Department regarding this Order should be sent as follows.Attention:Gaurav VasishtExecutive Deputy Superintendent of BanksNew York State Depatiment of Financial ServicesOne State Street,New York, New York 100048. All written communications to Prospect regarding this Order should be sent as follows.Attention:Ronald L. BergumChief Executive OfficerProspect Lending, LLC in lieu of Prospect M01tgage, LLC15301 Ventura Blvd. Suite D300Shennan Oaks, CA 914039. This Consent Order is not confidential; therefore, it shall be made available to the public.WHEREFORE, the Patties hereto have caused this Order to be executed.By:Ron L. BergumChief Executive OfficerProspect M01tgage, LLCDated:By:Gaurav VasishtExecutive Deputy Superintendent of BanksNew York Depatiment ofFinancial ServicesDated:9
PROSPECT LENDING, LLC IN LIEU OF TRUE NAME CONSENT ORDER . PROSPECT MORTGAGE, LLC . . was changed to "Prospect Mortgage, LLC", and in September 2009, the Department granted Prospect approval . and were engaging in loan origination business through series limited liability companies; WHEREAS, during the 2010 Fair Lending examination, which .
